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National Insurance hike offsets income tax allowance giveaway
The Good, The Bad and The Grey Haired: Pension Changes
Reform to tax rules for MPs expenses
Other issues affecting individuals

National Insurance hike offsets income tax allowance giveaway

From next April, the personal allowance will rise to £7,475 (after which point income tax is suffered) and this will leave basic rate taxpayers up to £170 per year better off according to the government's calculations.

This £1,000 increase will not benefit higher rate taxpayers as the income tax threshold when individuals pay higher rate tax will be reduced. In fact it is estimated that individuals earning over approximately £42,000 will each pay an additional £100 (rising to £500 for those earning over approximately £115,000) in income tax after 6 April 2011. The exact threshold figure will be confirmed later this year.

No one was expecting an absolute tax giveaway. Therefore, as previously announced, National Insurance contributions (NIC) for employees and the self-employed will rise by 1% across the board from 6 April 2011. Employees will pay NIC at 12% (above the primary threshold and below the upper earnings limit) and 2% above the upper earnings limit. The self-employed will pay NIC at rates of 9% and 2%.

There was some unexpected good news as the Government has announced that it intends to reduce the NIC upper earnings limit by £1,650 which would save £165 per year for those who have earnings which take them into the 2% NIC band (above the upper earnings threshold). Nevertheless, this does not really assist overall as they remain worse off due to the 1% NIC increase.

These NIC rises offset the cost to the Exchequer of the hike in the income tax allowance. These changes were announced previously by Labour in the Pre-Budget 2008 and Pre-Budget 2009 and the coalition government has not reversed the policy on this matter. Its mantra to reverse the 'tax on jobs' relates to employers' NIC has instead been partly implemented by the increase in thresholds above which the employers' NIC rise takes effect. It does take some close scrutiny of the paperwork to see what is being proposed and it falls short of being a complete reversal.

Broadly lower earners will benefit from the changes in this Budget but any savings for those workers earning above approximately £20,000 will be offset by paying more NIC from next April and higher rate taxpayers will see little to cheer.

The Good, The Bad and The Grey Haired: Pension Changes

Simplifying pension tax relief for high earners

The Chancellor has announced in the Emergency Budget that the extremely complex high income excess relief charge due to come into force from April 2011 for tax payers with gross incomes exceeding £150,000, will be replaced by a simpler maximum annual allowance.
This annual allowance is expected to be around £35,000 to £40,000 to restrict what the Chancellor called 'generous pension tax relief'. This is a substantial reduction from the 2010/2011 annual allowance of £255,000. Consultation is promised with interested parties before the new regime is introduced. There are a number of complicated issues to consider including protecting relief for basic rate taxpayers and dealing with pension accrual 'spikes'. Simplification is always to be welcomed but not at the expense of reducing the incentives towards saving for one's pension.

Ending the requirement to buy an annuity

With effect from 2011/12 the Government will end the requirement to use a pension fund to buy an annuity. The Government will consult on the detail of the changes to be introduced but anyone reaching 75 after 22 June 2010 will be able to take advantage of transitional measures.
These transitional measures mean that a money purchase scheme member can defer purchasing an annuity from their pension fund until they are 77. This will allow sufficient time for the new rules to be announced next year.
Inheritance tax charges are also relaxed for scheme members if they die after 22 June 2010 and are aged 75 or over.

Reform to tax rules for MPs expenses

After the furore of the MPs' expenses episode, the Chancellor has announced rules to amend the income tax rules and national insurance contribution (NIC) treatment for the new MP expenses regime.

Following the introduction of the Independent Parliamentary Standards Authority (IPSA) which is responsible for processing, validating and paying or rejecting MPs’ claims for expenses, the current tax legislation needs to be updated to reflect this fact.

There are differences in the tax treatment for MPs' expenses compared to those of employees. Generally, employees' expenses incurred 'wholly, exclusively and necessarily' in the performance of their role can be repaid by a business to the employee with no impact on the employee's tax and NIC liability. However there are strict rules regarding the reimbursement of travel costs to and from a place of work, so that generally ordinary commuting to and from work cannot be reimbursed by an employer without incurring any tax or NIC.

MPs' rules, previously imposed by a long standing concession, reflect that they travel between their constituencies and Parliament. This concessionary treatment will end and the new rules have been drafted to exempt certain expenses. If the rules were not amended, MPs could end up being taxable on some of the expenses they incur while performing their duties.

The amendments relate to certain accommodation expenses and travel expenses incurred on parliamentary business. The tax relief has been extended, and a statutory exemption will be backdated to have effect from 7 May 2010. Restrictions to spousal travel will be incorporated into these changes and MPs are to be briefed on the new rules. These changes will be pored over by the media looking to see if some unfair advantage has been gained.

Other issues affecting individuals

Furnished holiday lettings (FHL)
The Chancellor announced in the Emergency Budget a boost for owners of holiday homes and the leisure industry in general as the FHL tax regime, due to be abolished from April 2010, survives, for the time being, unscathed.

Under the FHL regime, a rental lettings business is treated as a 'trading business' (rather than an investment business) which conveys several tax reliefs. These include the availability of tax losses (which includes the ability to offset losses against general income), capital allowances and certain capital gains tax reliefs. Income deriving from the FHL business is also included as relevant earnings for pension purposes. However, specific conditions, such as number of days the property is let per year and the number of days it is available, need to be met in order for the business to qualify.

However, the Chancellor has also announced a consultation on reforms to ensure the regime applies equally to properties in the European Economic Area (EEA), to increase the number of days that qualifying properties have to be available for and let, and to change the way loss relief operates. The Government has stated that any changes will take effect from 6 April 2011, and in the meantime the current rules continue to apply for the 2010-11 tax year.

Other provisions previously announced
The Emergency Budget also included provisions relating to Individual Savings Accounts (ISAs) and settlor interested trusts which were originally in the previous Government's March 2010 budget but were omitted from the Finance Act 2010 as the legislation was rushed through parliament before the general election. For further details on these provisions please see our comment here.